SCOTT SIMON, Host:

And that Kaesong Industrial Park which Michael spied as he looked across the demilitarized zone is a curious island of capitalism. For the past couple of years, a dozen South Korean companies have built small factories there employing thousands of North Korean workers. Products from these factories make up a significant proportion of North Korea's meager industrial exports, and they probably won't be affected by any sanctions. Marcus Noland, a senior fellow at the Institute for International Economics in Washington, D.C. joins us. Thanks for being with us.

Mr. MARCUS NOLAND (Institute for International Economics): Thanks for having me.

SIMON: What do they make in this industrial park?

Mr. NOLAND: Right now they make things like household pots and pans. The South Koreans have much more ambitious plans, however, to eventually make petrochemicals and computer chips.

SIMON: Well, give us some idea of the respective interests of both the South Koreans and the North Koreans, the South Koreans in making stuff there, the North Koreans in permitting it.

Mr. NOLAND: Well, the North Koreans need foreign exchange and they have had a strategy of allowing limited enclaves of this sort to develop. They have another one which is a tourist site called Mount Kumgang. And they literally fence these things off. They do not want spiritual pollution. They do not want capitalism getting into North Korea. And they certainly don't want the average North Korean person having any contact with the South Koreans.

From the South Korean standpoint, there are basically two motivations. One is a political motivation. They want to encourage the transformation of North Korea into a less threatening entity and they want to encourage greater political and economic openness. The other motivation is an economic one. There are many small and medium-size South Korean enterprises that are being priced out of world markets, given wage rates in South Korea. But given access to the much cheaper labor in North Korea, they can remain competitive. So there are moving their operations to the north.

SIMON: Has this done the job that North Korea wants so far, the Kaesong Industrial Park?

Mr. NOLAND: The North Koreans seem to be reasonably happy with it. They're allowing it to develop. There have been a number of glitches along the way. But I think what is important for them is the fact that it remains an enclave. The amount of contact between North Koreans and South Koreans remains highly limited. Indeed, even within the zone, the South Korean factory managers are not supposed to have direct contact with the North Korean workers. They are supposed to work through North Korean intermediaries. Now, in fact that breaks down because it's simply impractical. But it suggests the degree of sensitivity the North Koreans have with respect to contact with South Koreans.

SIMON: And why is it that U.N. sanctions wouldn't apply to this industrial park?

Mr. NOLAND: Well, the U.N. sanctions, or at least the sanctions that are under discussion right now, are very limited in nature. They only go after certain commodities, including armaments, and they are aimed at certain North Korean factories or enterprises involved in the production of weapons of mass destruction. The Kaesong Industrial Park doesn't meet any of those criteria and it could continue to operate.

Now, the South Koreans could decide to suspend this operation of their own accord independent of what the U.N. decides to do. And indeed, South Korean policy at this point is really in tatters. Right now they say they're committed to continuing the operations of the park, though some people within South Korea believe that it should be suspended.

SIMON: Marcus Noland, senior fellow with the Institute for International Economics. Thank you very much.

Mr. NOLAND: Thank you.

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